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Platform profitability: Giving your platform wings

  • By Jason Stockwell

A recent white paper from Altus Consulting has highlighted some common areas of operational inefficiency when it comes to platforms. Ben Hammond explores the theme of platform profitability and concludes that while things are improving, there is still room for improvement


Six years ago Altus Consulting released a white paper, The Platform Machine: Tuning for Efficiency. In it we claimed that, in spite of ever increasing levels of assets under administration, all was not well in platform land. Revenues were rising across the board, but costs were outstripping them in, many cases significantly so. Fast forward to today and there have been a number of platforms which have moved into profit, some of them significantly so. As a result, we have re-evaluated the current platform industry and in this article I will highlight some of our main findings.

The number of platforms has continued to grow in recent years and there have been some that have moved into profit, many of them significantly so. Recently a few of those star performers have even begun to openly discuss IPO plans; a reflection of the positive outlook for this corner of financial services.

However, is this case for all platforms? At Altus we recently updated our research into platform profitability, which revealed that the story is not uniformly rosy across the platform sector when you examine profits, costs and the numerous factors that sit behind them.

Total AUA and revenue has risen, however revenue in bps has fallen

Total AUA has grown by 230% since 2011 as shown in Fig 1; however, total revenue has increased by just 27%. The explanation is margin pressure: revenue in bps was already falling in 2011, and has continued to slide. It now stands at 21bps, adding yet more pressure to the players in an industry in which it is notoriously difficult to make money. Fig 2 shows us that almost half (48%) of firms from a ‘pure’ platform background are in profit. They have achieved this largely by being run by visionary founders backed up by teams of creative problem solvers. As these innovative firms have tried to scale, however, issues have arisen that jeopardise their profit levels. In contrast, group-owned platforms, with their traditional model of high margins buffering the impact of high development costs, are largely unprofitable. This is often due to project overspends and decreasing margins, which keep profits firmly over the horizon.

Figure 1

Figure 1

The platform industry is still struggling to make a profit

Figure 2

Figure 2

Fig 2 shows us that almost half (48%) of firms from a ‘pure’ platform background are in profit. They have achieved this largely by being run by visionary founders backed up by teams of creative problem solvers. As these innovative firms have tried to scale, however, issues have arisen that jeopardise their profit levels. In contrast, group-owned platforms, with their traditional model of high margins buffering the impact of high development costs, are largely unprofitable. This is often due to project overspends and decreasing margins, which keep profits firmly over the horizon.

Run costs and revenue are both falling

Figure3

Figure 3

Effective revenue on platform assets continues to shrink; however, it seems that the cost of servicing both a customer and an adviser is falling at almost the same rate as you can see in Fig. 3. It’s common sense that costs need to be less than revenue to deliver a profit, but how can the industry get there?

The cost of sales

Translating some of the typical costs of selling a platform to users into the AUA required to support these costs is a useful exercise to better understand full sales costs as is shown in Fig. 4. Based on a total package cost of £160k, the average platform relationship manager would have to generate £100m of AUA in order to cover their costs. This calculation does not take into account future revenue, repeat business, retention or outflows, but it does provide some metrics with which to compare the financials of distribution.

Figure 4

Figure 4

Platform run costs across the industry

The run cost of platforms varies drastically by bps cos as Fig 5 shows. The highest operating costs come in at £115 per £10k AUA while the lowest is just under £4; the average was £28. Over 55% of platforms manage to service their client book for under 25bps (£25 per £10k AUA), up from 40% 12 months previously; the others are unable to keep costs below what an average platform would consider to be a fair charge level for their customers.

Scale is not the only key to profitability

It is tempting to assume that scale is the key to profitability, but our research reveals that profitability is determined more by whether or not the platform began life as a start-up. Platforms launched by large groups are, by and large, still struggling to make a profit when compared to the ‘pure’ platforms that began life as small and innovative start-ups.

Figure 5

Figure 5

Platforms experience a wide range of operating costs

We see the costs for a market trade ranging from 20p to over £3, which is quite a range when you consider that it doesn’t cost much more to trade £1m in a fund than £1k in one go.

Reconciling client money and client assets has become a focus for all platforms, but this activity has been reactive and tactical, creating interim processes that are typically manual and labour intensive. These manual processes can be difficult to remove from within businesses once they are established, not to mention expensive – our research found annual reconciliation costs as high as £420 per asset line. Automation is the key to driving this cost down, as platform technology systems AutoRek and SmartStream are doing in the platform landscape by offering pre-built integrations. The result is lower costs: certain platforms are now reconciling their assets for £30 per asset line, nearly 90% lower than their least efficient competitors.

Figure 6

Figure 6

Historically, the transfer of assets between providers was done on paper and by human intervention, leading to slow and expensive processes that entailed out-ofmarket risk and a poor customer experience. Open standards for transfers between providers have streamlined these processes, but many firms still rely on operations staff to oversee the process. However, Altus clients who have integrated electronic transfers into their operation have seen the cost per transfer reduced by 75%; the average ISA to ISA inspecie transfer costs has decreased to as low as £1 per transfer.

Typical platform capability cost view

The spread of nonoperational costs varies from platform to platform as is shown in Fig 6. Generally there is a significant amount of spend on IT and core infrastructure capabilities, alongside sales and support teams, but much less is spent on developing products and other areas of the proposition.

To sum up, while the platform industry has taken off over the last 6 years, for the majority, significant profits remain out of range. There is undoubtedly profit to be made in the platform sector, as evidenced by a few of the current high-flyers; the question is: can the rest of the pack keep up – and how they can do so?


Ben Hammond is Senior Consultant at Altus Consulting

Ben has been working in financial services for over 15 years, and specifically in the platform space for the last 8. Prior to joining Altus, he worked for both Cofunds and Ascentric, building and launching new products and propositions as well as navigating the complicated world of regulatory change. Ben works with a wide range of Altus clients across the UK and South Africa, helping them understand the future of the platform landscape, the impact change will have on running their businesses and how they can improve the efficiency of their operations.

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